Although the work my team at Oak Partners does is mostly concentrated with clients in their mid-50s to mid-70s, we do work throughout the age and financial spectrum. Our primary prerequisite when helping a family is simply “intent.”
In the work we do with younger families, I am beginning to see a phenomenon which I believe is a result of the timing in the rapid growth in the cost of college over the past couple decades. This new financial planning challenge is in helping families in their early- to mid-40s who are wanting to focus on saving for their own kids' college, and eventually retirement, but who are still dealing with their own student loans from college.
When considering student loans, I tend to view them as 10- to 15-year balance sheet items, and my experience is these loans are typically paid off for most people sometime in the early- to mid-30s. So, discovering families in their early- to mid-40s who are wanting to prepare for their own children’s college, as well as take stock of their retirement goals, is tricky.
Since I have run into this issue a couple times over the past few months, I’ve been contemplating the “why,” and researching strategies to deal with this topic.
When it comes to the why, I have concluded the primary reason behind this phenomenon is student loan debt is just too easy to carry. With early deferrals, earnings-based payment plans, special deferrals extended from the government during times of economic stress and refinancing options, paying only a little bit on these loans each month becomes an easy habit to form. Unfortunately, the underlying math with some these programs is not on the side of the borrower. Regardless of how easy the payments are, and how low the interest rates are, interest is inevitable and principal balances will continue to grow over time when payments are reduced or sometimes deferred.
When developing strategies to address these later-in-life loan balances, one of the primary resistance points is the typically low interest rates on some student loan products. My answer to this resistance is not the cost of the loan from an interest perspective, but rather the cost to the balance sheet from a cash flow perspective. Cash flow directed toward loan payments is money that can’t be directed toward goals or savings. The result often ends up being no emergency funds, no college savings for kids and lower retirement plan balances. So said simply, it's not the interest, it’s the payment that’s the problem.
Over my career, I’ve learned motivated mid 40s- to 50s-year-olds can do amazing things when it comes to working toward financial goals, as earnings are typically beginning to peak and financial behavior is often more mature during this period of life. It’s my job as a planner to help families identify goals, and to get them inspired to focus on achieving them. Managing legacy student loan debt during this really productive time of life can interfere with this process.
As I develop a planning process about this issue, I find myself in the frame of mind to be fairly aggressive in my advice. Beyond the process of just “tightening the belt” to redirect more income toward getting these loans paid off, I’m not opposed to reducing 401(k) contributions, using home equity or even, in some situations, taking an IRA withdrawal to get these balances eliminated. The cash flow savings that can then be redirected may quickly be able to get the family back to even, and then keep them moving forward at an even faster pace.
Oh, and one last distraction to avoid. There is a lot of political rhetoric about loan forgiveness, but not a lot of foreseeable action. I think anyone earning a reasonable income should be wary about this rhetoric regardless. By the time the government gets around to any policy of this type, these loans could be paid off for many, and don’t be surprised if and when a forgiveness program comes along, most successful earners aren’t eligible in the end anyway.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
